EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

The Tax Aspects of the EPA vs. Texas

Introduction

The Federal EPA has locked horns recently with the state of Texas regarding
Greenhouse Gas Emissions (GHGs) regulation oversight. As this epic power
struggle plays out, Texas companies who merely sit on the sidelines risk
foregoing major federal tax savings. Specific, energy-related federal tax
incentives are currently available for a finite period, so regardless of
Texas’s state emissions laws it is important for Texas industries to
carefully consider their options while major tax incentives are still
available.

Though the current battle is ostensibly about air permitting –
specifically whether the state or federal government has the jurisdiction to
issue permits – perhaps the greater concern is how Texas firms can best
achieve energy and tax savings while getting mixed signals from the state and
federal government. A late January ruling by District Court Judge Paul Friedman
declined to extend the EPA’s timeframe for resetting emissions
regulations to reflect the outcry from industry representatives who viewed the
original regulations as overly burdensome.1 Friedman’s
decision is sure to please environmentalists, but is just as sure to invite
further litigation. Fortunately, the opportunities to make substantial energy
efficiency improvements in Texas are tremendous because of its access to
natural resources and climate conditions. It may well behoove Texas companies
to invest in multiple tax-supported solutions available to reduce emissions so
that they can realize tax and energy savings while becoming a national leader
in efficiency, even if state policies don’t match federal ones.

Air Permits

Air permits have been around since the creation of the Clean Air Act in 1963
but gained significant prominence after amendments to that act in 1990, as they
represent the EPA’s ability to limit a building owner’s right to
emit or discharge a specific volume of specified pollutants.2 Before
2007, it was unclear whether the federal EPA had the jurisdiction to cap
greenhouse gas emissions in addition to other particulates, but a Supreme Court
ruling in that year held that GHG’s fall within the purview of the
EPA’s air permitting.3 Following that case, the federal EPA
issued guidelines that were meant to serve as backstops for each state’s
own permitting standards; while thirteen states have objected to the guidelines
proffered by the federal EPA, Texas is the only one to have outright refused to
comply.

The result is that the Lone Star State is the only place nationwide where
factories and electricity-generating plants that emit substantial greenhouse
gases can’t apply for the necessary permits to make modifications or
begin new construction. All this because Texas argues that the U.S. EPA's new
rules for power plants, refineries and other large industrial facilities will
"deprive Texas of its right to manage its air resources."4

While the concern in Texas is that the EPA’s decision to sidestep the
ordinary air permitting procedure – in which it is up to each state to
issue permits that comply with the federal EPA guidelines at minimum – by
issuing federal permits directly to Texas businesses “will create
gale-force headwinds for growth in a state that is the U.S. energy
capital,5” the truth is far less grim. Air permits that govern
what kind and how much GHG’s large power and industrial projects can
produce are only one factor that Texas companies may need to consider, and
since electrical power plants are some of the largest emitters around, there is
much to gain and little to lose by forging ahead with building retrofits and
renewable energy installations.

The Section 179D EPAct Tax Opportunities

Pursuant to Energy Policy Act (EPAct) Section 179D, Texas building owners
making qualifying energy-reducing investments in their new or existing
locations can obtain immediate tax deductions of up to $1.80 per square
foot.

If the building project doesn't qualify for the maximum EPAct $1.80 per
square foot immediate tax deduction, there are tax deductions of up to $0.60
per square foot for each of the three major building subsystems: lighting, HVAC
(heating, ventilating, and air conditioning), and the building envelope. The
building envelope is every item on the building’s exterior perimeter that
touches the outside world including roof, walls, insulation, doors, windows and
foundation.

Alternative Energy Tax Credits and Grants

There are multiple 30% or 10% tax credits available for a variety of
alternative energy measures with varying credit termination dates. For example
the 30% solar tax credit expires January 1st 2017 and the 10% Combined Power
tax credit also expires January 1st 2017. The 30% closed loop and open loop
biomass credit expires January 1st, 2014.

All alternative measures that are eligible for the 30% and 10% tax credits
are also eligible for equivalent cash grants for the three years staring
January 1st 2009 and ending December 31st 2011.

Unique 2011 Opportunity: Enhanced Bonus Tax Depreciation

Pursuant to the American Recovery and Reinvestment Act of 2009, there are
10-30% tax credits available to buildings owners who install solar or
wind-powered systems through January 1, 2017. These credits are ordinarily
eligible for a 5 year MACRS depreciation, but building owners who install these
renewable energy systems after September 8, 2010 through December 31, 2011 can
take 100% depreciation tax bonus immediately. Even if building owners miss this
2011 window, they can enjoy a 50% tax depreciation bonus on equipment placed in
service from January 1, 2011 through December 31, 2012.

Texas: A Booming State

The Texas economy is projected to increase by 2.6 percent in fiscal 2011
compared to the previous year, and by 2.8 percent in fiscal 2012 and 3.4
percent in fiscal 2013.6 Texas has proven resilient in the face of
economic turmoil around the rest of the country7, and for good
reason: the state has a large energy sector, abundant natural resources and an
ideal climate to support the transition to an efficient energy
infrastructure.

The state’s population has grown in recent years to mirror its
economy. In fact, according to the initial data from the 2010 U.S. Census,
Texas saw the greatest increase in population over the past decade.8
The state's economy gained 194,400 jobs from November 2009 to November 2010, an
annual growth rate of 1.9 percent.9 This surge presents an even
greater need for a change in energy infrastructure, which is both a challenge
and an opportunity. More people mean more of a strain is being placed on energy
resources, but, as Texas leads the nation in being home to 57 Fortune 500
companies10, it has the unique capacity to act in a big way
immediately. Nationally, many companies endeavor to upgrade their corporate
headquarters to LEED status, which means that Texas has the opportunity to also
take the first position with the number of LEED headquarter.11

Texas Alternative Energy Opportunities

Population growth, combined with the fact that the Texas economy continues
to outperform the U.S. economy in the current recovery, means incrementally
more needs to be done to meet the state’s energy needs. In Texas, there
are specifically three major emissions producers, namely utilities, refineries,
and industrial facilities. There are also three tax supported alternative
energy technologies that Texans can advantageously implement, namely solar,
wind, and biomass.

Utilities are quite familiar with the available emission reduction solutions
and can utilize a variety of special tax incentives, some tailored for their
industry to implement the necessary solutions. For example, utilities can now
take advantage of the 30% tax credit for large-scale wind and solar PV
installations at customer locations. These transactions help both the utility
and the customer. The utility meets some of federal air permitting obligations
and the customer locks in lower than market electricity cost for an extended
time period.

Coal fired utilities are one of the biggest emissions generators. As a
solution to reduce coal plant carbon dioxide emissions, a company can replace
coal with less emission-intensive fuel sources. To that end, Texas Lt. Gov.
David Dewhurst says he’s drafting a plan to encourage utilities to shut
down their dirtiest coal-fired power plants and replace them with facilities
powered by natural gas.12 Dewhurst said he would propose financial
and regulatory incentives to get utilities to use more gas, a cleaner-burning
fuel. But natural gas isn’t the only new source gaining momentum amongst
Texas utilities; starting a few years ago, Texas embarked on the transmission
line project, known as Competitive Renewable Energy Zones, and work is
currently being done to install a reliable transmission system to connect West
Texas’s wind farms with Texas’s large cities.

One famous Texas Brand, Frito Lay, has been an early player in energy
efficiency. As early as 1999, they began using natural gas to power their plant
in Rosenberg, Texas, but in more recent years, they have adopted creative
energy technologies to power their industrial processes. For instance, they
installed the first “oven heat recovery” system at their plant in
San Antonio. Some of the exhaust heat from Frito Lay’s ovens is used in
their fryers while other heat is used to heat their buildings.13

Solar

Texas is a sun-intensive state. It experiences an average of nearly 250 days
of sunlight per year.14 All this daylight translates into energy.

One of the first steps of solar tax planning is to analyze a
building’s current energy use to prepare the solar project economic
payback proposal. A building should be made as energy efficient as possible
before installing solar P.V., otherwise the extra electricity being generated
by the P.V. system is simply being wasted and the amount of extra electricity
available to sell into the grid for an enhanced economic return will be
diminished.

The most direct path to building energy reduction is to install an energy
efficient lighting system and an energy efficient heating, ventilation and air
conditioning (HVAC) system15 while utilizing the section 179D EPAct
benefits described above.

Wind

There are also large regions of open plains in the Texas’s rural
areas. In fact, Texas already lays claim to the most wind power generated of
any U.S. state, with 9,410 Megawatts. The state has pledged to add 5,000 new
megawatts of wind power by 2015, and in 2006, Governor Rick Perry partnered
with private investors to commit more than $10 B in new wind energy
infrastructure.16

Biomass

Valero, a large oil refiner headquartered in San Antonio, has recently
committed $50 M towards upgrading its facilities in Michigan to become a
cellulosic refinery.17 While this plant is not in Texas, Valero has
multiple refineries in Texas that may benefit from this initiative. Biomass
refinery is also a candidate for alternative energy tax credits or cash
grants.

Nothing to Lose

Texas is not the only state currently making news about emissions.
Massachusetts and California have made national headlines for their recently
issued comprehensive plans to cut GHG emissions. Ian Bowles, the Massachusetts
Secretary of Energy and Environment, has thrown down the gauntlet challenging
the naysayers by saying that, “people who have studied this find you can
get your first 20-30 percent of greenhouse gas cuts without making significant
economic trade-offs18 .” In then describing the Massachusetts
plan, he continued that it “puts the lie to the Chicken Little-oriented
debate on the national scene [that equates reduction of emissions with job loss
and economic disruption].” Massachusetts and the EPA are following the
global trend and steadily seeking to curtail GHG emissions. The Massachusetts
companies have variety of tax incentives they can use to help manage the
process.19

In California, America’s other big energy state, the government has
been tasked with similar energy reduction targets. On the one hand, California
enjoyed the comparable advantage of having pre-existing building energy codes
on which it could piggyback GHG and energy efficiency measures. This is tougher
for Texas, who is being asked to play catch-up without laws that are already
receptive to efficiency measures.20 However Texas enjoys access to
natural resources and climate that suits it perfectly for GHG emissions
reductions as well as overall energy reductions while at the same time
experiencing a much more robust state economy than California. And
there’s always something to be said to the “Bigger in Texas”
mentality – they can get things done when they put their minds to it.

Complimentary Texas Incentives

Texas industries that are trying to remain ahead of the curve have placed
great emphasis on reducing emissions for the transportation sector. For
instance, in Houston, Walgreens has installed electric car battery charging
stations as part of the company’s larger initiative to “go
green.”21

Austin was one of the first movers on a major Smart Grid project. The
city’s smart-grid project is aimed at figuring out how to make the
electricity grid work as homeowners begin to put huge numbers of solar panels
on rooftops. "The goal of the Pecan Street Project is to provide one power
plant's worth of clean, renewable energy, and to produce it within the city of
Austin,22" said Brewster McCracken, the city's mayor pro tem, at a
press conference during a clean-energy summit in the city. Ultimately, the
project will prove to significantly reduce emissions. Austin is also one of the
first five major jurisdictions to mandate the benchmark reporting of building
energy use. 23Austin is considered one of the nation’s most
creative cities and is a launching point for many car manufacturers first
electric vehicles.24

Conclusion

Texas companies confront GHG uncertainty while the EPA and the state battle
it out. This will work itself out in the federal courts. What is certain are
major federal tax incentives available to all building owners who retrofit
their property with efficient lighting, HVAC, or building envelope and building
owners or utilities that install wind, solar, or biomass energy facilities.
Prudent companies will want to act on the currently available tax incentives,
which are certain.